Gold mines see action as prices soar; Hutti to reopen Chitradurga mine - Quoted in the Economic Times

As gold prices hover at all-time highs, companies are about to reopen mines that were abandoned for various reasons. India's lone gold miner Hutti Gold Mines is reopening its closed Chitradurga mine after a gap of six years because at current prices, even this low-grade ore is viable.

Others like Hindalco that dig up gold as they mine copper are ready to reap an unexpected Diwali bonanza from the yellow metal.

"We are planning to revive our mine in Chitradurga which has been unused for the last six years, due to the rise in gold prices," said ML Patil, executive director of Hutti Gold Mines, a public sector undertaking.

Gold prices have jumped nearly 40% in the last one year, trading at over 28,000 for every 10 gms.

Karnataka state-run Hutti Gold Mines is now the biggest operational gold mining company in India. Bharat Gold Mines, operated by the Central government, was closed down in 2001 when its operations became unviable.

Private sector miner, Deccan Gold Mines, which is still fighting for its mining licence, also plans to lobby for more mines in the southern states after the surge in prices.

"We expect to receive our mining licence for Ganajur-main stock within the next few weeks and the gold price rise will certainly increases our profitability substantially," said Sandeep Lakhwara, CEO of Deccan Gold Mines. "In addition, we will be announcing several more projects in the Deccan region partly because of effects of the higher gold prices," he added.

Even though India is the largest consumer of gold in the world, most of its demand is satisfied by imports, which were valued at $34 billion in 2010-11.

Production at domestic mines has been abysmal even though the primary gold ore reserves are reckoned to be around 19.25 million tones of proved and probable reserves, but the ministry of mines pegs reserves at 3.9 billion tonnes.

Hutti mines produced 2,220 kg of gold last fiscal, Patil told ET. Gold mining in India has been considered unviable because mines here are low grade from which only 3-4 grams of gold can be extracted from one tonne of ore. In comparison, mines in South Africa can produce anywhere between 8 to 17 grams of gold per tonne of ore. But now international gold prices could justify the higher costs of mining gold in India. "Although it's a low grade mine we will be able to extract around 300 kg of gold in one year from Chitradurga", said Patil. Hutti Mines which made a profit of 120 crore in 2010-11 will be able to pocket more money as the mine will increase output by 14%.

In addition, copper mining companies like Hindalco and Hindustan Copper are also expected to benefit from the gold surge.

"Our copper production is expected to be higher by 8% and gold is a byproduct of that. So, to the extent gold prices increase and our output increases, our realization from gold will also be that much higher", said Shakeel Ahmad, CMD, Hindustan Copper, a state PSU. Hindustan Copper made a profit of 96 crore last year on account of gold and silver byproducts and is trying to expand production to the Hutti Copper mines as well.

Hindalco, the Aditya Birla group aluminium and copper major, is expected to benefit big time from the gold surge. The company produced 6.97 tonnes of gold in 2010-11 in valued at 1,118 crore. The company had a net profit of 2,137 crore in 2010-11. However, top officials refused to comment as they await a board meeting in the near future.

"It is true that mining companies where gold is an associate mineral of copper will benefit. It also makes sense for them to increase production," said Dipesh Dipu, director, consulting for mining at Deloitte.

Indian Imported Coal based Power Generation Projects - My views published in the Powerline magazine

1) What according to you should the government do to resolve the issue of hike in Indonesian coal prices for projects which are already tied up in PPAs?

Indonesian coal prices have impacted projects that were bid out on competitive tariff based on imported coal, such as Mundra and Krishnapatnam UMPPs. While these had the inherent risk of tying life-of-project long fuel supplies, pricing of the fuel added yet another dimension to the risk. This in view of the fact that miners are turning out to be price-makers and the demand and supply scenarios in the global market seem to indicate continued dominance of the mining firms in price setting. However, the structure of bidding indeed provided for risk mitigation mechanism through escalable and non-escalable components of the fuel/energy charges. The bidding strategy adopted by several players participating in these bids reflected their expectations of prices as much as their control over those. Essentially a bidder with fully escalable fuel charges component may be considered risk averse and having little control over the prices of imported coal whereas one with fully non-escalable fuel charges component may be considered risk tolerant and with control over prices, these representing the entire spectrum. For the first type of bidder the residual risk remained in the movement of actual prices of landed coal versus the escalation permitted through the computation of movements of underlying indices, but if the fuel charges presented in the bid reflected the cost of coal procurements at the time of bidding, these risks may be considered lower in comparison to the other bidder. Thus, it can be stated that the bidding norms indeed provided for a mechanism for risk mitigation. The bids submitted by the participants, therefore, reflected more their respective expectations of movements of prices of coal in the international markets and degree of control each could have on these, either through owning minority stakes in mines and securing price preferences or outright 100% ownership in the mines and keeping tight control on costs.


The issue of Indonesian coal price hike has become prominent now due to the fact that price preferences or cost plus transactions of coal proposed have been negated by the recent Indonesian legislation that forces all transactions to happen at market prices, which are global index linked and are proposed to be approved by the Government of Indonesia. Many saw it coming since low priced coal from Indonesian mines meant the Indonesian Government losing on income taxes and royalties, both linked to price of coal.


On part of the Government of India, or its coordinating agencies, it may be prudent to revise the guidelines in way that the political and regulatory risks of a nature that's difficult to foresee and manage may be addressed through appropriate modifications in tariffs. However, these must not be left open-ended, in which case the competition may lose its sheen.


2) How can the increase in costs be shared by different stakeholders?


For the already bid out projects, there seems to be little recourse although there have been petitions for suitable amendments to tariff structures to make it more reflective of costs of coal procurements. Recent cases of decisions made on Case 1 bids indicate that regulatory commissions may not have the leeway to allow such changes. In such a scenario, the power project companies may bleed, although not necessarily the group companies that may hold assets in Indonesia. However, there is no denying that tariffs should reflect costs of power generation, and hence, the consumers should bear lion's share of the rise in costs. But that said for the competitively bid our projects, it may be tough to discern whether project risk event may have occurred due to developer's aggression and confidence in control of fuel value chain.

The other options for cost sharing may be less preferred - the government/tax payer or the developer - since propagating subsidies will impact the efforts to reform and adverse impact on investment returns of the developers can squeeze investment in the sector. These in any case may be only short term measure as the future tariff based competitive bids will see bids reflective of the new ground realities.

Singareni Collieries may hike coal price - Quoted in the Mint

The country’s second largest coal producer, Singareni Collieries Co. Ltd (SCCL), is set to increase the price of the fuel after a 35-day strike by workers in the Telangana region of Andhra Pradesh caused production to decline and as the company prepares to raise wages and pay a Diwali bonus.

“A price hike is under consideration,” said J.V. Dattatreyulu, director (operations). “We need to get permission from the Central government before we do it.”


SCCL employees returned to work on Tuesday after ending the walkout, part of the campaign for a separate state of Telangana that also shut educational institutions and disrupted public transport in the region comprising 10 districts of Andhra Pradesh.

SCCL, which produces 1,65,000 tonnes of coal daily, last revised coal prices, which depend on the calorific value or heat value of the fuel, in August.

The coal miner may end up missing its production target of 53.4 million tonnes for the current fiscal which ends on 31 March 2012. The strike caused SCCL a production loss of 4.5 million tonnes.
“...we still have five-and-a-half months in the current financial year to try to make up for production we lost,” Dattatreyulu said.

SCCL produced 51.33 million tonnes of coal and earned Rs. 9,892.14 crore of revenue in the year ended 31 March 2011.

The revenue loss on account of the strike is estimated to be in the range of Rs. 550-600 crores.
SCCL has 50 mines, including 14 open cast and 36 underground mines, spread across four districts of Telangana. It has 67,104 workers, making it the biggest employer in the region.

“The prices of domestic coal have been rising, albeit sporadically, on a cumulative annual growth rate of 7-8% for the regulated businesses like power sector,” said Dipesh Dipu, director-consulting, mining, at Deloitte Touche Tohmatsu India Pvt. Ltd.

“The uncertainty around the quantum of price increase makes assessment of impact difficult but generally every Rs. 100 per tonne increase in coal price can make energy dearer by 4-6 paise per kilowatt-hour,” he said.

SCCL also faces a higher wage bill, with workers’ pay expected to rise by as much as 25%. The yearly wage bill of the company is Rs. 2,650 crore. SCCL also pays a Diwali bonus on par with Coal India Ltd​, the country’s largest miner, which recently agreed to pay a Rs. 21,000 bonus. SCCL will spend nearly Rs. 130 crore to match the payment.

Technical Due Diligence for Mineral Resource Acquisitions - My article in the Mining India magazine

The resource crunch in India has led to a large number of Indian companies seeking to acquire assets in foreign countries with a few to secure raw material supplies to their downstream operations in India or for trading. The transactions have been reported in energy minerals such as thermal coal and uranium, and ferrous and non-ferrous minerals like iron ore, base metal ores for copper, lead and zinc and several others. The foreign acquisitions in mineral resources have unique characteristics due to the nature of mining industry, some of the important ones are as follows:


• High risk projects

• Capital intensive

• Price takers (which may have changed off late)

• Cyclical cash flows and profits

• Remote locations

• High environmental and social impacts

• Finite life and depleting assets

• Mine closure and land reclamation liabilities

• High regulatory and political risks

These are generally considered while the acquisition decisions are made but one key factor that forms the backbone of the mining business is the resource base, for which technical due diligence is a must. In the race to acquire assets, time constraints limit the extent of technical due diligence and hence, the risks of geotechnical surprises are higher.

Three Keys

The keys to successful technical due diligences are three fold:

1. Competent persons – those who have relevant experience, certified by an agency that holds them accountable for their work. In case of India, such standard setting and monitoring adherence to those standards by qualified and certified experts do not exist, which makes the assessment of technical consultants tough. The need however is to hire consultants that may have experience in the same or similar minerals, in similar geological and geographical settings such that their experience can be leveraged.



2. Credentials – of the team that takes technical due diligence work. Here the stress has to be on the members of team rather than the firm, since hands-on experiences are usually held by individuals and most such experiences may not be transferred even with advances in knowledge management tools. That said, a firm can bring holistic view with experience from a wider range of minerals, geographies and geologies, which may be bring in new perspectives and hence allow better technical assessment.



3. Work plan and time frame – these become critical when there are pressures to complete the assignment on time. The decision-makers need to assimilate the findings of technical, financial, legal and commercial due diligences within the time frames allowed by the sellers and come up with a firm offer, which usually creates a constraint on the accuracy and precision of assessments. Technical due diligence in mining may be considered the element that requires longer time due to large number of complex assessments done, ranging from adequacy of exploration, appropriateness of exploration methods, assessment of information capture and analysis techniques, assessment of assaying and chemical analysis, ore body modeling, resource and reserve assessment, geo-technical review and mine planning, equipment selection and several other key parameters. Time constraints typically hastens the processes of checking adequacies and appropriateness of processes and forces focus on the relevance of the outcome, which are in the forms of estimated resources and costs of mining to markets. This can leave exposure to risks and may have significant impact on investments subsequently.

Components of Technical Due Diligence Studies

The first level objective of the due diligence study is to arrive at resources and reserves available. Generally, resources are those quanta of mineral that have reasonable likelihood of profitable extraction, which are then classified into measured, indicated and inferred categories in the decreasing order of confidence. Reserves are economically mineable part of resources that are demonstrated through appropriate studies and are classified as proven and probable confidence categories.

For prudent assessment of reserves and resources, one of the concerns is the quality and quantity of data. South African, Australian and Canadian industries have set standards of processes for data collection, analyses and computations, which are summarized in compliant reports. Reliability of data points to reliability of the resource and reserves computations and these typically follow the rule of garbage-in-and-garbage-out. It is in the data that lays the reliability factor since the ore body modeling and computations are entirely based on input data, and hence, salting or peppering exploration data can lead to misleading reserves and resources assessments. The pertinent question therefore is if the data is verifiable. In cases of time frames being liberal, a few boreholes may be drilled at locations from where samples were picked for report preparations and results may be compared.

The processes of surveying, sampling, drilling, logging, coring, collection of samples, storage of samples, testing, chemical analyses and tabulation of results may be compared with standards established by JORC of Australia, for example, to test their appropriateness.

The data management system verification is another part of the technical due diligence. The best practices in this aspect require survey control, processes of data verifications, control of metadata (data in the raw format that is formatted subsequently), and process and frequency of updates. In some of the potential transactions for coal mining in Indonesia, the standards of data management systems were quoted as a concern.

Resource modeling has turned sophisticated with advent of computers and there are several software products available to help. The geo-statistical tools are built into the software although there are manual options as well to choose among the methods of data correlation and hence, modeling of ore bodies. Key inputs to development of these models are exploration data about thickness, quality parameters and surveys, so that the model turns into a three dimensional representation. As part of the due diligence process, one can verify data input and the competent person can verify the ore body model and run scenarios to establish impacts on the resource and reserve estimates.

Subsequent to ore body modeling, classifications of ore contained in the asset into various categories of reserves and resources are done in accordance with technical, legal and economic feasibility parameters, which are combined with probabilistic scenarios. Technical feasibilities depend on depth, dip and strike, number of folds and faults, hydro-geological features, topographical features and several others. Legal feasibility parameters are with regard to permissibility of mining in the proposed areas, which may be restricted due to forest type, population or such other factors. The economic parameters typically are costs of extraction and expected realizations of the mined products.

The economic parameters also depend upon the mine planning exercise that is done as an iteration to establish reserves and resources. Mine planning (different from the statutory requirement under the Indian laws) typically includes determination of mine design, equipment selection, excavation schedule, design of haulage, waste dump locations, defining locations for mine infrastructure and such other features. These indicate development and capital expenses. The annual costs of operations are also estimated based on excavation and production schedules, requirement of human resources, fuel consumption, consumables, environmental compliance requirements, social commitments, royalties and taxes, and such others.

Technical due diligence therefore requires assessment of these assumptions and their inter-relationship with resource and reserve estimation. These, however, may be easier from the process point of view as the software products can shorten the time required for review. However, the assessment of assumptions that are more commercial in nature may require multi-disciplinary team to conduct a thorough technical due diligence.

Risks of Failure in Technical Due Diligence are high

By nature the risks in mining projects are magnified at the start of the project. If the subject of due diligence is a green-field asset, the significance of technical due diligence is enormous. An error in diligence may result in over payments for acquisition for sure but continued reliance on the data made available during the transaction process may lead to incorrect mine design, which may have far greater impact on investment returns.

In one of the cases, reliance on the geological data and ore body model led to a company investing in shaft sinking on the hanging wall side, which had the risks of collapsing and hence, had to be abandoned subsequently. The investments in terms of both time and efforts yielded a failure which could have been prevented by a closure due diligence, at a cost that could be only a fraction of investment and opportunity cost lost.

Failure in technical due diligence may have one or several of the following risks:

a. Investment in unworthy asset

b. Technical issues in future development of mine

c. Selection of inappropriate fleet of equipment

d. Compromise on the production capacities

e. Loss of mineable reserves due to construction of infrastructure on the surface

f. Poorer design that lead to higher operating costs

g. Environmental issues

The list is not exhaustive and there can be several other results which may be due to hasty technical due diligence.

Technical due diligence therefore has high impact risks for which there must be care taken to ensure that the required checks have been done to establish credentials of the asset well. While in comparison the future costs may sure be higher but immediate costs tend to dry up financial resources of the investor and enhance the risk appetite to a level that forces the investor to forego prudent acquisition opportunities that come subsequently.

Conclusion

While there may be a trade-off necessitated by transaction time frame for acquisition of mineral resources, it may be wise to investigate the subject mineral asset prudently. These involve assessment of processes and outcomes to delineate and definition of resource bases. It may be prudent to hire consultants that have relevant experience for taking such due diligence work and a multi-disciplinary team may add perspectives to the process. The findings of technical due diligence should be appropriately discussed before the investment decisions are made. While the significance of legal, financial and commercial due diligence exercises cannot be undermined, technical due diligence does form the back bone since the reserves and resources are the prime value-drivers of mining projects. This also because mine design and construction done relying on the same technical inputs may lead to irreversible damages whose financial impacts may be huge.

Power Sector in India - My views in the Power Line magazine

Could you list the noteworthy achievements of the power sector in the last one year? How did the sector score in meeting demand, improving efficiency and how was the sector’s overall growth?
The power sector achieved a milestone in power generation capacity addition in the last one year crossing 10,000 MW for the first time, with greater role being played by the private sector. However, it must be looked at in perspective that during the 11h Plan Period (2007-12), India planned to add 78,700 megawatt power but revised it downward to 62,000 megawatt and India may still fall short of target by 10,000 megawatt by the end of March 2012. Public private partnership in inter-regional transmission through tariff based competitive bidding is positive considering that the deficit in transmission capacity is greater than that in generation. In distribution sector, various States have been attempting distribution franchise model. There has been a reduction in peak power deficits, which, for example, stood at 8.7% in the month of June 2011. There have also been efforts in demand side management and energy efficiency improvements with some degree of success. But these may not paint an optimistic picture of the sector that continues to have potential for growth but is falling short on accounts of sluggish reforms, shortage of fuel and risk perceptions.
What were some of the impeding issues and factors that hindered growth of the sector?
The top three key issues in power sector are fuel supplies, hurdles in project implementation and the financial health of the State owned distribution companies. Coal is and will remain the mainstay of Indian power generation and the domestic coal supplies have not been able to keep pace with the growth in demand. 2010-11 saw negligible growth in coal production which was compounded by problems of logistics. While there were coal shortages at power plants the inventory at pit heads remained at nearly 70 million tonnes. The vast resources of coal and shortages remain dichotomous as CIL and captive coal block owners have struggled to operationalize the mines. Imports have become expensive with continued rise in coal prices and Indonesian laws mandating all transactions at market linked benchmarks. The levels of shortages forecast also indicate that international markets may be distorted due to Indian demand which will aid the stiffness in pricing. The availability at such high prices is still not a guarantee.
It has been reported that 50% of the power sector loans have remained unused caused by project execution milestones being missed due to problems in fuel linkages and clearances. Like the coal mining sector, power sector too has struggled with land acquisition. There are serious challenges in obtaining other clearances and approvals. The unpredictability of these processes lend uncertainties to project development that also impacts their financial attractiveness. Equipment shortage and lack of human resources with relevant experience have also been concerns for project implementation.
Financial health of the state owned distribution companies is worrisome and these tend to raise the elasticity of demand. Higher cost power may remain unsold as distribution companies resort to load shedding, this while there is demand for power. The supply chain through distribution companies has had this negative impact all the while the open access has been advocated with limited implementation. The obvious side of the story is that power generation capacity addition gets impacted due to counter-party risks wherever the financially weak distribution company signs the power purchase agreement.
What kind of policies and strategies are needed to overcome these issues and accelerate growth?
For the fuel supply issue the key is to focus on the development of domestic market, which must include participation of independent coal miners. The captive model has resulted in slower development as the utilities tend to have limited experience and expertise, and are seen to share risks disproportionately with the mine developers and operators (MDOs). While the industry waits for the Parliament to pass the Coal Mines Nationalization (Amendment) Bill 2000, there are options for participation by the independent miners. The definition of ‘captive’ which in the current form applies to miners with a signed fuel supply agreement with a power project can be eased further to allow miners to execute fuel supply agreement with a stipulated time (say, 6 months) since the allocation of coal block. There is perhaps a scope of implementing Ultra Mega Coal Mines (UMCM) through a cost-of-production based bidding in which coal miners may participate and sign the coal supply agreement with CIL or coal thus produced by these mines be distributed by the mechanism of Standing Linkage Committee.
The other issues for coal sector are those of policy and fiscal stability. Competitive bidding has been debated as the way to go for coal allocation but there is no clarity yet on the details. Added to this is the proposal for 26% profit share for project affected people and local area development. While the merit for this has to be debated, it goes without saying that a final word sooner will settle the rules of the game for life to move on.
On imported coal, the focus should be on development of infrastructure for coal handling and transport within the country as also for providing fiscal incentives for coal mine acquisitions abroad. Bidding guidelines for tariff based competitive bidding may need to be revisited so that financial viability of imported coal based project is not threatened. There may be merit in the argument that developers cannot be expected to bear fuel price risks related to changes in law in coal exporting countries as applicable under the existing bidding guidelines.
For the project implementation issues, the simplification of procedures will certainly go a long way. Land acquisition bill is being debated and there seems to be no consensus still in terms of role of Government in facilitating land acquisition and modes of compensation. Environmental clearance procedure needs to be made predictable for an outcome and effective monitoring of the application through information technology intervention is a must.
On the financial health of distribution companies, the reforms are a must which can range from various models of distribution franchise to outright privatization though that may not be politically palatable. It must be considered that beyond the weak distribution companies there are power consumers who have the appetite and necessity for power, and, as someone said, no power is more expensive than no power.